Aid cuts will have limited budget impact

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THE budgetary impact of various donors’ decisions to suspend aid to Uganda in response to legislation that in¬creases penalties for homosexuality should be limited

THE budgetary impact of various donors’ decisions to suspend aid to Uganda in response to legislation that in¬creases penalties for homosexuality should be limited, Fitch Ratings says.

Uganda has become less dependent on aid in recent years, and the authorities have managed the budget through previous suspensions by re-prioritising spending.

Grants as a proportion of revenue fell from 40% in 2002 financial year to 12% in 2013 financial year, and we forecast them to fall further, to 9% in 2014 financial year, as robust economic growth has boosted other revenues.

This has reduced the risk to government finances posed by volatile aid flows (there have been several previous instances of aid being suspended due to donors’ concerns about corruption and mismanagement, most recently in 2012).

The government may choose to re-prioritise some spending if additional countries opt to suspend aid, although this is unlikely to affect flagship projects. The development of two long-delayed power projects, the 600Megawatts (MW) Karuma and Isimba hydropower dams, together costing $2.3b, has resulted in an upward revision to the budget deficit forecast for 2014 financial year to 7.1% of GDP, from 5.3%.

But the underlying balance, which strips out the impact of the new loans funding the projects, which will be repaid out of the project’s cash flow, shows the 2014 financial year deficit increasing only slightly, to 3.6% of GDP from to 3.4%.

This is more representative of the prudent fiscal stance since debt relief in 2006, which has helped keep public debt to GDP well below the ‘B’ range median, at an estimated 33.9% at end 2013.

On Thursday, Sweden became the fourth donor to suspend aid to Uganda following President Yoweri Museveni’s signing last month of a bill that tightens laws against homosexuality.

The World Bank has postponed a loan to Uganda’s health system worth $90m, although this may yet go ahead.

Norway and Sweden have cut $9m, and Denmark is redirecting aid away from the government and towards NGOs. The total amount of aid suspended is worth around 0.4% of GDP, but it could grow as the US – Uganda’s largest bilateral donor, providing around $400m annually - has said it will formally review its assistance programmes.

The Uganda shilling has sold off by around 2% in response to the negative news flow but remains one of the strongest performing currencies in the region this year.